Good points (as usual, I might add), Steffen and Karlos!
One thing, though. The Italian industry as such was weak compared to the other great powers, but that will only count in a prolonged conflict. Had the Italians been, shall we say, more thoughtfull and realistic in regards to the way one wages a modern war, instead of drawing all the wrong conclusions from the SCW and the Abyssinian campaign, they might actually have a chance of claiming a true Mare Nostrum.
So, let's see, the divisions remain triangular, I think the term is, instead of reducing their strength to two regiments. Lesser, but stronger divisions and the logistics is simpler too.
The Regia Aeronautica (Royal Airforce) had planes like Giuseppe Gabrilli’s G.50 Freccia (Arrow), Longhis's Reggiane Re.2000 Falco (Falcon) and Mario Gastoldi’s Macchi series, (The MC.200 Saetta - Lightning -, MC.202 Folgore - Thunderbolt - and MC.205 Veltro - Greyhound), but didn't focus on them untill too late. Let's have the pilots and brass in the RA recognize that all-metal mono-planes with enclosed cockpits is the way of the future, as well as onboard radios, 20-30mm cannons and liquid cooled inline engines. Again, we haver fewer, but way more powerfull units. A few doctrines are learned as well, so the RA will use the finger-four and wingman-formations.
The Regia Marina (Royal Navy) take a closer look at what the French and British are putting to sea and realises that they need a force multiplier. Hmm, what to do?! Well, the Savoia-Marchetti S-79 Spareviro (the Sparrowhawk aka the Damned Hunchback) was an incredible tough and reliant plane AND was actually tested as a torpedo bomber in 1937. The RM now orders a Gruppi or two of the S-79's and some reconnaissance planes as well (Re.2000's?!).
A very important last issue; the Italian Merchant Marine. As war approcahes Mussolini and his Fascisti in Rome make sure that the ships are at home or at least in friendly waters.
When Mussolini finally decides to throw in his lot with Hitler the Regias and the Regio Esercito (Royal Army) is ready. In North Africa the British fall back as they get hammered by the more powerfull Italian divisions as the Regias put to both sea and air to help their comrades on the ground.
In France the offense stalls and soon bogs down. There is no way short of not attacking France or ASB's that will allow the Italians to break the French linies in Southern France.
In the Med the RN and RAF is being fought to bloody standstill and is actually defeated in some battles as modern Italian fighters and their deathdefying pilots blast the older British designs out of the sky and Hunchbacks and RM surface units sinks everything that moves (as the Italians recon ability is now present in form of long range Re.2000's and onboard radios).
Having the British actually fighting for their life in Egypt and the Med more or less a Mare Nostrum in the autumn of 1940, the war will take a very different turn than in OTL, I'll say. Politically speaking Churchill will be weakened and his government might fall after a very short time in office. Heavy loses in the Med and retreat on all fronts will be hard for even Churchill to handle. The fact that the Brits are unable even to beat the Italians will hurt their morale a lot, I think. So, an early peace between Britain and the Axis? The Balkans will be rearranged, so to say, and the invasion of the USSR will kick off in early sommer 1941 with a large contingent of seasoned and confident Italians troops. The Italian Armed Forces will have access to more German help in form of technology (motors, cannons etc etc) and resources as the Italians are seen more as true partners than incompetent infantiles...
Best reagds!
- B.